New York's "Stay Or Pay" Prohibition Could Implicate Common Employee Compensation Arrangements

Key Highlights

• New York prohibits arrangements requiring employees to repay or reimburse their employer: The newly enacted Trapped at Work Act bars employers from enforcing agreements that require workers to repay or reimburse training or other costs or payments if they leave employment before a specified period.
• Ambiguous language creates risk for common compensation practices: Although motivated by controversial training repayment arrangements, many commonplace practices like education stipends, tuition assistance programs, forgivable loans, advanced retention bonuses and certain consulting arrangements may now face challenges.
• Law applies broadly to workers beyond employees: The Act covers not only employees, but also independent contractors, interns, volunteers, apprentices and other service providers, with only limited statutory exceptions.

New York employers are now prohibited from enforcing or requiring so-called "stay-or-pay" contracts that obligate employees to repay money to their employer if they leave employment prior to a stated date. With the new "Trapped at Work Act," New York joins other states, including Colorado and California, in protecting employees from requirements to reimburse their employer for employer-provided training. Although the Act and other similar laws have been motivated by criticisms of employer training repayment requirements, the breadth and ambiguity of New York's new law threaten to go beyond that immediate concern and prohibit or render uncertain many commonplace employee compensation arrangements.

The Act prohibits employers from using or enforcing any "employment promissory note," which is defined as "any instrument, agreement or contract provision that requires a worker to pay the employer, or the employer's agent or assignee, a sum of money if the worker leaves such employment before the passage of a stated period of time," including any agreement to reimburse training provided by the employer. The scope of the Act is broad, as it applies not only to traditional employees, but also to independent contractors, interns and externs, volunteers, apprentices and sole proprietors providing services.

The Act does exclude certain types of agreements from its prohibition, including:

• Agreements to repay the employer for sums advanced to the employee, other than sums for "training related to the worker's employment with the employer";
• Repayment for property sold or leased to the employee; or
• Repayments pursuant to a collective bargaining agreement.

Although the Act is aimed at controversial arrangements requiring employees to repay their employer for mandatory trainings, it may inadvertently sweep in other commonplace employee compensation frameworks that do not raise similar controversy. These include:

• Education Stipends: Employers often provide educational or tuition stipends to employees, and it is common to have retention provisions included in such arrangements. It is not clear whether such arrangements would continue to be permissible, given that the funds may not be advanced directly to the employee and the education likely relates to the employee's position.
• Forgivable Loans/Advanced Retention Bonuses: Arrangements where funds are fronted to employees, subject to a retention requirement, can potentially fall within the Act's exceptions, but they must be carefully structured to avoid penalties and enforceability issues. These types of arrangements and bonuses are common in many industries, especially financial services.
• Liquidated Damages for Consulting Arrangements: Given that the Act applies to independent contractors (even if properly classified as such), it is arguable that a penalty for the contractor's early termination of the agreement would violate the Act.

Even as New York Governor Hochul signed the Act, she noted that its language "was ambiguous in certain respects" and stated that she had agreed with the Legislature to "address these concerns" in the future. Unless and until clarification is provided, however, employers in New York will have to review and carefully modify any agreements that require employees or other workers to repay sums to the employer based on retention considerations. Failure to do so can lead to the agreement being deemed null and void and subject the employer to fines, ranging from $1,000 to $5,000 for each worker with whom they have a prohibited agreement, as well as liability for attorneys' fees incurred by the employee in defending against enforcement.

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